CHAPTER III

INDUSTRY ANALYSIS: POSITIONING THE FIRM WITHIN THE

SPECIFIC ENVIRONMENT

Industry analysis is a tool that facilitates a company's understanding of its position relative
to other companies that produce similar products or services. Understanding the forces at work in
the overall industry is an important component of effective strategic planning. Industry analysis
enables small business owners to identify the threats and opportunities facing their businesses, and
to focus their resources on developing unique capabilities that could lead to a competitive
advantage.
The firm’s interaction with its environment

FIRM

SPECIFIC
ENVIRONMENT

GENERAL
ENVIRONMENT

A. The Industry Structure

1. Suppliers
2. Competitors and Potential substitutes
3. Potential entrants
4. Buyers

B. The components of Industry

1. Competitor and Potential Substitute
Substitute’s definition is the availability of a product that the consumer can purchase
instead of the industry’s product. A substitute product is a product from another industry that
offers similar benefits to the consumer as the product produced by the firms within the industry,
threat of substitutes shapes the competitive structure of an industry.
2. Potential Entrants
Threat of new entrants refers to the threat new competitors pose to existing competitors
in an industry. Therefore, a profitable industry will attract more competitors looking to achieve
profits. If it is easy for these new entrants to enter the market – if entry barriers are low – then this
poses a threat to the firms already competing in that market. More competition – or
increased production capacity without concurrent increase in consumer demand – means less
profit to go around, threat of new entrants is one of the forces that shape the competitive structure
of an industry.
Forces Driving Industry Competitions

3. Buyer and Supplier

The competitive situation of business firms is influenced by the nature of its transactions
with buyers and suppliers. Buyers exert their power in the industry when they forces down prices,
bargain for higher quality, and play competitors against each other. On the other hand, suppliers
can exert bargaining power over participants in an industry by threatening to raise prices or reduce
the quality of purchased goods and services.

• Buyer Bargaining Power

Buyer bargaining power refers to the pressure consumers can exert on businesses to get
them to provide higher quality products, better customer service, and lower prices. When
analyzing the bargaining power of buyers, conduct the industry analysis from the perspective of
the seller.
 Buyer Power is High/Strong

• Buyer is concentrated

• Buyers face few switching costs

• Buyer’s industry open to backward integration

• Buyer has full information

• Purchases from selling industry are undifferentiated

• Buyer purchases comprise large portion of seller sales

• Buyer is price sensitive

• Substitutes are available

Buyer power is important in an external analysis of an industry as it provides an

understanding of the profit potential in an industry. High buyer power diminishes the industry
profitability and lowers the attractiveness of an industry. This may deter new entrants or cause
existing firms to make more strategic decisions to improve the profitability of their company.

Purpose of Buyer Power Industry Analysis

The bargaining power of buyers, used in conjunction with the other forces (threat of new
entrants, rivalry among existing competitors, bargaining power of suppliers, threat of substitute
products or services), provides an external analysis of an industry and allows companies to:

1. Determine threats and opportunities in the industry

2. Determine if above-average profits are attainable in an industry
3. Understand the competition in the industry
4. Make more informed strategic decisions

• Supplier Bargaining Power

Supplier power refers to the pressure suppliers can exert on businesses by raising prices, lowering
quality, or reducing availability of their products. When analyzing supplier power, you conduct
the industry analysis from the perspective of the industry firms, in this case referred to as the
buyers.

Supplier Power is High/Strong

• Supplier’s industry dominated by few companies and more concentrated than target
industry
 • No substitutes available to target industry
• Target industry not important customer of supplier’s industry
• Supplier’s products important input in target industry
• Supplier’s products are differentiated or has built up switching costs
• Supplier’s industry open to forward integration

The idea is that the bargaining power of the supplier in an industry affects the competitive
environment for the buyer and influences the buyer’s ability to achieve profitability. Strong
suppliers can pressure buyers by raising prices, lowering product quality, and
reducing product availability. All of these things represent costs to the buyer. Furthermore, a
strong supplier can make an industry more competitive and decrease profit potential for the buyer.
On the other hand, a weak supplier, one who is at the mercy of the buyer in terms of quality and
price, makes an industry less competitive and increases profit potential for the buyer.

Purpose of Bargaining Power of Suppliers Analysis

When doing an analysis of supplier power in an industry, low supplier power creates a
more attractive industry and increases profit potential as buyers are not constrained by suppliers.
High supplier power creates a less attractive industry and decreases profit potential as buyers rely
more heavily on suppliers.

C. Status of the Industry

1. Concentration/Fragmentation
Concentration within an industry refers to the degree to which a small number of firms
provide a major portion of the industry's total production. If concentration is low, then the industry
is considered to be competitive. If the concentration is high, then the industry will be viewed as
oligopolistic or monopolistic. Government agencies such as the U.S. Department of Justice
examine concentration within an industry when deciding to approve potential mergers between
industry firms.

The most common measure of concentration is the four-firm concentration ratio, which is
defined as the percentage of the industry's output sold by the four largest firms. An industry with
a four-firm concentration ratio of forty percent is generally considered to be competitive.
2. Maturity

After the Introduction and Growth stages, a product passes into the Maturity stage. The
third of the product life cycle stages can be quite a challenging time for manufacturers. In the first
two stages companies try to establish a market and then grow sales of their product to achieve as
large a share of that market as possible. However, during the Maturity stage, the primary focus for
most companies will be maintaining their market share in the face of a number of different
challenges

Challenges of the Maturity Stage

Sales Volumes Peak: After the steady increase in sales during the Growth stage, the market starts
to become saturated as there are fewer new customers. The majority of the consumers who are
ever going to purchase the product have already done so.

Decreasing Market Share: Another characteristic of the Maturity stage is the large volume of
manufacturers who are all competing for a share of the market. With this stage of the product life
cycle often seeing the highest levels of competition, it becomes increasingly challenging for
companies to maintain their market share.

Profits Start to Decrease: While this stage may be when the market as a whole makes the most
profit, it is often the part of the product life cycle where a lot of manufacturers can start to see their
profits decrease. Profits will have to be shared amongst all of the competitors in the market, and
with sales likely to peak during this stage, any manufacturer that loses market share, and
experiences a fall in sales, is likely to see a subsequent fall in profits. This decrease in profits could
be compounded by the falling prices that are often seen when the sheer number of competitors
forces some of them to try attracting more customers by competing on price.
3. Exposure to International Competition

Particular industries such as fast foods and consumer products can effectively compete
across national markets. in these industries, the task of product differentiation to suit divergent
market tastes and preferences are a significant managerial concern.

The status of the industry is very much affected by its nature. for example, in the
Philippines, the industry economies of scale in the oil refining industry limits participation to three
large companies at the present time, one of which is state-controlled. By nature too, maturity of
industry is faster reached in low technology oriented production industries such as garments and
handicrafts. Finally, certain industries, such us apple-growing may not be suitable at all because
of climatic conditions.

D. Intra-Industry Competition

THE THREE BASIC COMPETITIVE STRATEGIES

1. Cost-leadership Strategies
Large businesses use cost-leadership strategies to achieve the lowest possible production
and distribution costs through economies of scale. Firms that pursue cost-leadership strategies tend
to have strengths in purchasing, manufacturing, and distribution, which help them manage their
costs. Companies with this strategy typically target value-seeking customers with no-frills, basic
products and penetration pricing.

This is the easiest competitive strategy to copy, meaning that other large competitors may
be able to set lower prices to capture more market share. However, cost-leadership strategies can
help large businesses fight off challenger companies and brands that may not have the operational
strength and size needed to drive prices to their lowest points.

2. Differentiation Strategies

Companies using differentiation strategies target quality and value-seeking customers with
premium offerings and strong brand equity. Their competitors cannot offer what they offer.

To pursue a differentiation strategy, you might focus on a smaller part of the current
offerings. Whole Foods and its strategy to offer a large variety of organic products—rather than
one shelf or aisle, like most grocery stores—provides an example of this strategic option in play.
Also, Whole Foods exclusively sells a number of organic products.
3. Focus Strategies

Some businesses choose to focus on one or more narrow market segments to protect
themselves from competition. A focus strategy helps companies with limited resources compete.

The first type of focus strategy is to become the cheapest offering in a highly targeted
market segment. For example, you might focus on having the lowest priced coffee in a
particular geographic area. This is similar to a cost-leadership strategy, but more highly
specialized.

Another focus strategy is to target niche market segments with specialized product lines.
As with the difference between cost-leadership and a price-centered focus strategy, a niche-market
focus differs from a differentiation strategy by its specialization on highly customized offerings
that target specific market subsets.

COMPETITOR ANALYSIS
All competitors address the same issues with respect to product design all the way down to
the market they commonly share. Analyzing competitors is a crucial and central component of
strategy formulation. Competition is a “given”. Competitor analysis must be a conscious and
systematic effort. It is a difficult undertaking when biases on the part of the firm’s managers are
likely to color their assessment of competitors.

Components of Competitor Analysis

COMPETITOR’S COMPETITOR’S
FUTURE GOALS CURRENT STRATEGY

COMPETITOR’S
RESPONSE PROFILE

COMPETITOR’S COMPETITOR’S
ASSUMPTIONS ABOUT STRENGTHS &
ITSELF & THE INDUSTRY WEAKNESSES
a. Future Goals of the Competitor
An individual competitor’s goals, when analyzed, will tell us the direction of the
competitor. It reveals whether the competitor finds its current position within the industry
satisfactory or not. Goals must be diagnosed at both the parent company level or at the SBU level.
b. Assumptions Held by the Competitor
The competing firm must held certain assumptions about itself as well as its competitors.
These assumptions set the parameters by which it will operate.

c. Competitor’s Current Strategy

The current strategies of competitors must be continuously monitored. The marketing
group of a firm is usually in the best position to report on these strategies because they are the
firm’s front liners in the battleground.

d. Competitor’s Capabilities
This component addresses what the firm is in a position to do. In identifying the individual
competitor’s strengths and weaknesses relative to others, one is able to predict which competitor
is likely to take advantage of particular opportunities or threats within the environment.

SELF-ANALYSIS: WHAT IS THE FIRM’S COMPETITIVE ADVANTAGE?

Competitive advantages are conditions that allow a company or country to produce a good
or service of equal value at a lower price or in a more desirable fashion.
The firm should assess its own strengths and weaknesses. There are two main areas in
which strengths and weaknesses can be identified. The first area relates to the firm’s product
design, financial position, organizational attributes, managerial and human resources, and extent
of market coverage. The second area refers to the capabilities of the firm to react to or anticipate
growth opportunities, environmental changes, or threats to its continued existence.

E. Industry Analysis and Strategic Decisions of the Firm

If a firm wishes to compete in other industries, they must establish SBUs and may follow
the framework that will be presented below in order to do so. This would help in deciding whether
to operate in one industry, or to venture into other industries as well.
 Decision to Enter New Businesses/Industries

The five basic end-line alternatives presented above:

1. Close shop
2. Capacity expansion
3. Status quo
4. Vertical integration
5. Entry into an unrelated industry
These five are borne out of three intermediate branch alternatives (presented in boxes):
1. Exit from the industry
2. Stay within the industry
3. Diversification or entering other industries
 The following questions must be addressed by the firm to guide decisions on the end-line
courses of action:

Question A: Having operated within the industry, is the firm earning fair returns on its
investments?
YES = stay within the industry
NO = the succeeding question is asked

Question B: Are the exits barriers (Eg. specialized assets, high separation costs, long-term
contracts) insurmountable?
YES = stay within the industry
NO = exit from the industry because returns are low and exit barriers are easily
hurdled
Question C: Having exited from that industry, does the firm see itself competing elsewhere?
YES = diversify into other industries
NO = the firm undertakes close shop

Question D: Having stayed within the industry, is the growth potential within the industry
attractive enough for the firm to exploit? Alternatively, does the firm feel capable of growing
within the industry?
YES = the firm undertakes capacity expansion
NO = may take the status quo alternative
or
= diversifying while concurrently competing w/in the present industry

Question E: Having decided to diversify, does the firm wish to expand its coverage of its product’s
value chain from primary raw material suppliers to ultimate end consumer? Alternatively stated,
does the firm wish to compete directly with its present buyers and suppliers?
YES = the firm takes vertical integration (Forward integration = To compete with
its current buyers; Backward integration = To compete with its current
suppliers)
NO = the firm may enter into an unrelated industry
References:
Business Policy In an Asian Context by Emanuel Soriano
https://www.inc.com/encyclopedia/industry-analysis.html
https://strategiccfo.com/threat-of-substitutes-one-of-porters-five-forces/
https://strategiccfo.com/supplier-power-one-of-porters-five-forces/
https://corporatefinanceinstitute.com/resources/knowledge/strategy/bargaining-power-of-
suppliers/
https://corporatefinanceinstitute.com/resources/knowledge/strategy/bargaining-power-of-buyers/
https://www.cleverism.com/bargaining-power-of-buyers-porters-five-forces-model/
http://frog-dog.com/three-competitive-strategies-business/

https://www.investopedia.com/exam-guide/cfa-level-1/microeconomics/markets-concentration-
measures.asp#ixzz5DchpzoRl
 CHAPTER III
INDUSTRY ANALYSIS: POSITIONING THE FIRM
WITHIN THE SPECIFIC ENVIRONMENT

MANA 3103: BUSINESS POLICY AND STRATEGY

Submitted to:
Prof. Marilou B. Mondana

Submitted by:
BEREBER, Andrea G.
BONAOBRA, Ailyn B.
CLARO, Naomi Anne Chafel L.
DE JESUS, Maria Pamela L.
PANO, Anne Carelen V.
BSA 3-14

April 25, 2018